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Financials Look Vulnerable

I know traders are looking for bottoms in banks and brokers, but the charts just don't tell that tale, and key stocks look dreadful.m

As expected, trading desks returned to full power Tuesday and they were sellers of the gains last week. This is not to suggest that the desks are bearish. They are probably looking for some way to make a silk purse from the sow's ear that this year has been. Still, there could have been little doubt that the rally through SPX 1100 was going to get sold. The larger question -- and something that is very often missed in the financial press is -- will the breakout level at SPX 1087 hold?

That is the key in the near term, as SPX 1087 represents the 50-day exponential moving average for the index. If the index can hold that level this week, bulls will have a reasonable shot at last week's highs and perhaps much more. If that level fails, well, it is going to get ugly again.

I am honestly flummoxed. I feel this is a key juncture and may very well define the rest of the year. My guess is the SPX 1087 level will hold this week, but experience tells me the rally we get from that level will be short lived. Quite frankly, there are just too many very weak charts. Leadership is very poor.

One sector that looks particularly vulnerable to me is the financials. I know many of my colleagues are looking for bottoms in banks and brokers, but the charts just don't tell that tale. Key stocks look dreadful.

Today, despite the fact that I look for the SPX to hold 1087, I am going to add a bearish position for MasterCard (MA) - Get Mastercard Inc. (MA) Report. I will do so by selling the October 210 calls and buying the October 220 calls. My expectation is, MA will ultimately head for the $180.00 area. I will execute this trade if I can get a $2.25 credit.

Trades: Sell to open MA October 210 calls at $4.15 or greater and buy to open MA October 220 calls for $1.90 or less.

At the time of publication, Terry Bedford held no positions in the stocks or issues mentioned.

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Terry is the Founder and President of Bedford & Associates Research Group. Terry writes for AOL Finance and MSN Money and is regularly quoted by the financial media.

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